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Bankruptcy and the Collateral Channel

Author(s)
Benmelech, Efraim; Bergman, Nittai
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Abstract
Do bankrupt firms impose negative externalities on their nonbankrupt competitors? We propose and analyze a collateral channel in which a firm’s bankruptcy reduces the collateral value of other industry participants, thereby increasing their cost of debt financing. We identify the collateral channel using novel data of secured debt tranches issued by U.S. airlines that include detailed descriptions of the underlying collateral pools. Our estimates suggest that industry bankruptcies have a sizeable impact on the cost of debt financing of other industry participants. We discuss how the collateral channel may lead to contagion effects that amplify the business cycle during industry downturns.
Date issued
2011-03
URI
http://hdl.handle.net/1721.1/64634
Department
Sloan School of Management
Journal
Journal of Finance
Publisher
American Finance Association
Citation
BENMELECH, EFRAIM, and NITTAI K. BERGMAN. “Bankruptcy and the Collateral Channel.” The Journal of Finance 66.2 (2011) : 337-378.
Version: Author's final manuscript
ISSN
0022-1082

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